A stochastic newsvendor game with dynamic retail prices

Abstract

We extend stochastic newsvendor games with information lag by including dynamic retail prices, and we characterize their equilibria. We show that the equilibrium wholesale price is a nonincreasing function of the demand, while the retailer's output increases with demand until we recover the usual equilibrium. In particular, it is then optimal for retailer and wholesaler to have demand at least equal to some threshold level, beyond which the retailer's output tends to an upper bound which is absent in fixed retail price models. When demand is given by a delayed Ornstein-Uhlenbeck process and price is an affine function of output, we numerically compute the equilibrium output and we show that the lagged case can be seen as a smoothing of the no lag case.

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